Apple's $356 million acquisition of fingerprint sensor maker AuthenTec was the result of mad scramble to forge a licensing agreement with the company before ultimately determining that the technology was so key to future developments that it made the most sense to buy all of the firm's intellectual property outright and immediately.

Apple begins licensing talks with AuthenTec

Apple's unexpected acquisition of the Florida based AuthenTec last month gave the iPhone maker a portfolio of patents and control of its supply of fingerprint sensors, touch chips and related security technologies. However, a recent filing with the United States Security and Exchange Commission by AuthenTec, cited in a report by TNW, reveals a heightened sense of urgency by Apple to gain access to the company's technology as soon as possible.?

According to the filing, AuthenTec first began floating a new technology to "several leading consumer electronics companies," likely including its existing component customers Alcatel-Lucent, Cisco, Fujitsu, HBO, HP, Lenovo, LG, Motorola, Nokia, Orange, Samsung, Sky, and Texas Instruments.

None of the companies AuthenTec approached expressed an interest in developing the technology apart from Apple, which began a conversation with the firm late last year. AuthenTec noted that the main reason Apple was the only interested party appears to be the cost involved.

Authentic also stated that while "multiple parties approached the Company regarding possible strategic transactions over the last two years," those "approaches never developed past preliminary conversations and preliminary exchanges of confidential information about the Company."

Negotiations between AuthenTec and Apple began in February 2012 and initially involved a licensing agreement that attempted to hammer out how much of its Intellectual Property AuthenTec would make available to Apple, and how much of its engineering resources would be devoted to developing the technology to fit Apple's needs.

Apple jumps to acquisition talks

The two parties couldn't reach an agreement on licensing terms by the end of March. On May 1, Apple dramatically shifted the scope of the deal by notifying AuthenTec that now planned to acquire the company in its entirety. Apple offered a 15 percent premium over the company's market capitalization ($7.00/share), a price the iPhone maker said "other potential buyers would be unwilling to pay."

Since 2009, Apple has only acquired a dozen other smaller companies. A quarter of these highly selective, strategic moves involved mapping companies, resulting in the new Maps features that will appear in iOS 6.

Most of Apple's other known acquisitions were also rapidly converted into key product features, from Lala (which made its way into iTunes Match) to Quattro Wireless (iAd) to Polar Rose (camera face recognition), IMSense (iPhone HDR) and Siri. The rest involved processor and chip design firms that rapidly made their way into the silicon of iOS devices.

Talks fall back to licensing, remain urgent

Just one day after informing AuthenTec that it planned to purchase the company, Apple contacted it again, describing its purchase offer as "very attractive" and warning the company that it would have difficulty bringing its new technology to market because Apple's competitors "have dozens of different smartphone platforms, in contrast to Apple?s unique narrow product platform, which allows for unity of design in component parts across significant unit volumes.?

Apple also an expressed urgency in gaining access to AuthenTec?s technology related to "product plans and ongoing engineering," leaving the security firm to note in its filing:

"As a result of its focus on timing, Apple?s representatives also informed the Company that Apple would not participate in an auction process and would rescind its proposal if the board decided to solicit alternative acquisition proposals for the Company. Mr. Ciaccia responded that he would convene a board meeting to discuss the proposal and would revert to Apple with the board?s position on Apple?s proposal."

AuthenTec subsequently contacted Apple with a $9.00/share counteroffer, to which Apple initially responded it would pay no more than $8.00/share. It then halted further acquisition talks due to concerns that were raised during its due diligence process. Despite the acquisition issues, Apple remained focused on working with the company in a licensing agreement to bring its technology to market.

In July, AuthenTec told Apple it had resolved the issues holding up an outright acquisition, and serious negotiations resumed, although AuthenTec remained open to unsolicited bids from another companies during the talks. AuthenTec noted:

"Apple emphasized its requirement that the development of the technology would not be interrupted regardless of whether the proposed transaction was completed. On the evening of July 19, the parties agreed to the key terms of the IP agreement and the development agreement."

License now, acquire ASAP

AuthenTec and Apple ultimately reached an acquisition deal where Apple would pay $8.00/share, a 58 percent premium over the company's July 26 stock valuation. After a vote by shareholders to approve the deal, AuthenTech would merge with Bryce Acquisition Corporation, a wholly owned subsidiary of Apple Inc based in Delaware "formed by Apple solely for the purpose of entering into the acquisition." The BAC would then be dissolved, resulting in AuthenTec being an Apple subsidiary.

During the approval process, Apple also agreed to pay $20 million for the "right to acquire non-exclusive licenses and certain other rights with respect to hardware technology, software technology and patents of the Company" including "commercialization of 2D fingerprint sensors for use in or with Apple products," with an option to extend the licensing agreement perpetually for $115 million. Apple also spent $7.5 million for AuthenTec to "perform certain non-recurring engineering services."

If for any of several reasons the acquisition was not approved or canceled by either party, AuthenTec would either pay Apple a termination fee of $10.95 million, or Apple would pay the firm $20 million to back out. However, "the Company and Apple are working to complete the merger as quickly as possible," the filing noted.

What did Apple want so badly?

In the filing, AuthenTec described its own business as providing "a series of products including fingerprint sensors, software and intellectual property that provide security, convenience, personalization and navigation features in such end-use products as PCs, tablets, smartphones, printers, network servers and gateways."

It added, "our portfolio of products has significantly expanded during the past two years and now includes smart fingerprint sensors, area sensors, fingerprint sensor chipsets and modules, USB fingerprint readers, identity management software and embedded hardware and software products and services."

Fingerprint scanners have been commonplace on Windows PC notebooks for at least five years. Last fall, Fujitsu incorporated AuthenTec's fingerprint scanner on its Regza Android-based smartphone for DoCoMo in Japan, enabling users to unlock the screen without using either a passcode, finger gesture or the much maligned "face recognition" feature Google debuted last fall in Android 4.0 "Ice Cream Sandwich" (Fujitsu's new phone uses Android 2.3; just 16 percent of Android's installed base has a newer version).

Basic fingerprint authentication

Fingerprint scanners on a new iPhone, iPad or Mac would enable users to login without remembering a long password. On a mobile device, fingerprint scanners can also be used to secure mobile transactions, adding a second authentication factor of proving "what the user is" (via a fingerprint) to "what the user knows" (such as a password) and or "what the user has" (such as a barcode presented by Passbook or a potential new NFC chip).

This type of "multiple factor" authentication could also be used to enhance security for iTunes and App Store purchases and when connecting secure apps such as banking or email. If the user's password is guessed or their phone is stolen, there's still another hurdle for thieves to jump in supplying a fingerprint scan.

Apple could even prevent iPhones from being shut off unless a fingerprint is scanned first, thwarting thieves from being tracked with "Find My iPhone" by forcing them to disassemble the device to kill the power instead of simply turning it off. But these features are not new, and certainly didn't require Apple to initiate one of its largest acquisitions ever just to obtain.

The following report describes the unique technology Apple was so adamantly interested in acquiring for its upcoming products.

Looks like this sensor would fit just fine in the outside upper corner of the new iPhone. There is a larger and exactly the same shaped rectangle slot in the frame. Plus, glass coverings will still exist in the upper and lower part of the phone and would explain why the headphone jack went to the bottom.

As well, it seems that a lefty or righty holding the iPhone could easily swipe down an index finger to run a transaction.

****Additional notes. This sensor will most likely be a proprietary "Apple Sensor" designed with the help of AuthenTec's technology and expertise. I assume by the slot size, it will be nearly the same sensor in this article, just larger to fit the iPhone 5 purposes. Apple also probably wanted to acquire the company as widely mentioned in order to avoid future collaboration and royalties in subsequent models of the iPhone. Obviously, once in the product, we will not want to lose the capability.

Fingerprint scanners are great when you live in a dry climate, but I've found as soon as there's an ounce of humidity in the air, my fingerprints get gummed up with sweat, and they won't scan properly. Just another thing for Samsung to copy and then argue that "patents can't be owned."

I wonder if there's something last minute that will be included in the iPhone this September which necessitated this acquisition. Security is definitely something I wouldn't want to be skimped on especially with NFC in the wings.

I wonder if the sensor is small enough to incorporate it into the rectangle on the home button...

The actual fingerprint sensor is pretty small, actually. It won't fit into the little square on the home button, but it will certainly fit on the home button itself. I'm sure if Apple really wants to do it, they will. They can even make an optical version by using the camera to authenticate fingerprints similar to the way door locks and those fingerprint machines use by LiveScan and police departments. If anyone could pull it off, it's Apple.

Originally Posted by Gazoobee
I would go so far as to say it's a bit irresponsible of the tech blogs to imply this.

It's really on the person to not believe outlandish crap when presented, regardless of the source. Or, rather, they can believe whatever they want, they just don't have any right or explanation to come on here and whine about how the iPad didn't get a touchscreen and solar panels on the back.

What happens if Apple decides to drop licenses for new products that others use?

There are only a couple of companies that do this and Apple will have a lower cost per device, so it will be more cost effective for Apple to have bought the company rather than license the technology. Plus they can further develop it as time goes on to make it even slicker.

This technology will enable Apple to compete better in Government, Corporate markets, which is something Apple needs to do.

It's a bad idea to put fingerprint scanner to iPhone. Motorola tried it with the Atrix 4g, never took off, people just don't use that function. All those fingerprint scanners on laptops also never being used by most people who bought them, just sitting there doing nothing.

Why? Because for general consumers, they value convenience over security. That might be dumb, but that's the reality.

Indeed. Unless it's a software only solution (unlikely), I would be extremely surprised if it showed up in the new iPhone despite everyone saying it will this morning.
I would go so far as to say it's a bit irresponsible of the tech blogs to imply this.

Agreed. On both points. The next iPhone is supposedly already being manufactured. It's done.

Why don't they use the camera and photo-recognize you? I'm sure most of us have the same ipad eye-shot smug lifeless look anyways, there's no variation in that. Apple has always done something innovatively creative, it's time to bring back the wow factor.

It's a bad idea to put fingerprint scanner to iPhone. Motorola tried it with the Atrix 4g, never took off, people just don't use that function. All those fingerprint scanners on laptops also never being used by most people who bought them, just sitting there doing nothing.

Why? Because for general consumers, they value convenience over security. That might be dumb, but that's the reality.

That argument doesn't stand... They tried tablets before Apple came along, and no OEM's could gain traction in the marketplace with their versions. The difference when the iPad came along was a quality interface that people already understood (no awkward OS to learn... it didn't need a manual), large numbers of adopters making the hardware easily adapted to many user environments, and the support that Apple provides through updates and service to their devices. People that had never owned a Mac before were all of a sudden toting their i-Whatever, and proudly.

Apple makes things sheik that weren't previously. This happens consistently now because their execution has been so consistently good that they've gained the trust of consumers.

Fingerprint scanning will be the next wave of security parameters on devices that builds trust with consumers as they feel that they are more protected. The more data that goes onto devices, the hungrier consumers will be for better security. My kid can memorize my iPhone password, but can't open it if I have a scanner activated. ATM machines will likely follow, and who knows what else. Cars? Homes? Personal IT security is about to change, and Apple just ensured that it is on the cutting-edge of this.

NFC without a fingerprint scanner: Either have the annoyance of having to enter your passcode before every purchase - moderate security as most people are lazy about passwords. No passcode - just like current credit cards but easier to steal (who last looked at your cc signature?). Or a fingerprint scanner. Inconvenience is quite low. Everyone would want to use it for all the features gained over passcodes. 95% of folk would use it (standard lock like currently in place - 5 minutes for me. Always when approving a purchase.)

It is useless for sheep to pass laws outlawing carnivorism when the wolf is of a different mind.

That argument doesn't stand... They tried tablets before Apple came along, and no OEM's could gain traction in the marketplace with their versions. The difference when the iPad came along was a quality interface that people already understood (no awkward OS to learn... it didn't need a manual), large numbers of adopters making the hardware easily adapted to many user environments, and the support that Apple provides through updates and service to their devices. People that had never owned a Mac before were all of a sudden toting their i-Whatever, and proudly.

Apple makes things sheik that weren't previously. This happens consistently now because their execution has been so consistently good that they've gained the trust of consumers.

Fingerprint scanning will be the next wave of security parameters on devices that builds trust with consumers as they feel that they are more protected. The more data that goes onto devices, the hungrier consumers will be for better security. My kid can memorize my iPhone password, but can't open it if I have a scanner activated. ATM machines will likely follow, and who knows what else. Cars? Homes? Personal IT security is about to change, and Apple just ensured that it is on the cutting-edge of this.

The Atrix doesn't matter.

Not so sure. Security is a hassle, and people want to see as little as possible. Apple's success is partly due to getting rid of the need for extra software/hardware on your OS/system to manage the madness. Antivirus scans, backup systems, disk management.. all things mac users love to not know about or see when they're doing real work. I still don't like needing to type my password before making a phone call. I mean, seriously, you don't have to on a non-smart cell phone. Why are we suddenly worried that people will be using our phones to call?

Why don't they use the camera and photo-recognize you? I'm sure most of us have the same ipad eye-shot smug lifeless look anyways, there's no variation in that. Apple has always done something innovatively creative, it's time to bring back the wow factor.

Heck I could be right, and the article is just rumors.

The difficulty is that it's fairly easy to spoof a camera by using a picture of the person. It is harder to fool a fingerprint scanner.

That's not to say that they couldn't find a way around it (for example, requiring you to first turn your head one way and then the other), but it's not trivial.

"I'm way over my head when it comes to technical issues like this"Gatorguy 5/31/13

It's a bad idea to put fingerprint scanner to iPhone. Motorola tried it with the Atrix 4g, never took off, people just don't use that function. All those fingerprint scanners on laptops also never being used by most people who bought them, just sitting there doing nothing.

Why? Because for general consumers, they value convenience over security. That might be dumb, but that's the reality.

Uh..... NO! I prefer to swipe my finger than to type in a password. Yes, I put a password on ALL my laptops. It's much MORE convenient to swipe a finger than to take time typing in a password, especially in the dark and the keyboard is not lit.

The difficulty is that it's fairly easy to spoof a camera by using a picture of the person. It is harder to fool a fingerprint scanner.
That's not to say that they couldn't find a way around it (for example, requiring you to first turn your head one way and then the other), but it's not trivial.

Yes, I get that obvious flaw, but that's if you or I implement the solution. Apple is smarter than me. Lets see what they come up with. Maybe SIRI can ask ME questions, and I have to answer it while it captures the movement of my lips and analyzes my voice.

It's a bad idea to put fingerprint scanner to iPhone. Motorola tried it with the Atrix 4g, never took off, people just don't use that function. All those fingerprint scanners on laptops also never being used by most people who bought them, just sitting there doing nothing.

Why? Because for general consumers, they value convenience over security. That might be dumb, but that's the reality.

Consider, that it can be used to provide convenience and security, automatically and transparently. For example: as soon as you tap the home button on your iDevice, it knows who you are -- so you can bypass logging on (account# and password entry) to buy something, view private information, or just reconfigure the device to reflect your preferences/history, say, for a TV remote control.

This is hot!

"Swift generally gets you to the right way much quicker." - auxio -

"The perfect [birth]day -- A little playtime, a good poop, and a long nap." - Tomato Greeting Cards -

NFC without a fingerprint scanner: Either have the annoyance of having to enter your passcode before every purchase - moderate security as most people are lazy about passwords. No passcode - just like current credit cards but easier to steal (who last looked at your cc signature?). Or a fingerprint scanner. Inconvenience is quite low. Everyone would want to use it for all the features gained over passcodes. 95% of folk would use it (standard lock like currently in place - 5 minutes for me. Always when approving a purchase.)

Excellent points!

"Swift generally gets you to the right way much quicker." - auxio -

"The perfect [birth]day -- A little playtime, a good poop, and a long nap." - Tomato Greeting Cards -

It's a bad idea to put fingerprint scanner to iPhone. Motorola tried it with the Atrix 4g, never took off, people just don't use that function. All those fingerprint scanners on laptops also never being used by most people who bought them, just sitting there doing nothing.

Why? Because for general consumers, they value convenience over security. That might be dumb, but that's the reality.

Maybe, but you need to consider that apple products are becoming the "gold standard" in companies, including large-scale enterprise companies. With this technology, the IT guys are going to have even more trouble justifying using anything except an Apple device, because the security of Apple is second to none.

If somebody loses their Android phone, the company secrets are there for the whole world to see. If somebody loses an iPhone, the thing will be a brick without the proper fingerprint.

I don't think that any government in the world will allow anything other than Apple devices once this tech gets fully implemented.

Buying this company and keeping fingerprint scanning exclusive to apple is a brilliant move.

Oh, definitely yes!

Then consider the consumer side... when dad is controlling the TV with an iDevice or remote -- he gets sports and news and adult options. Sis picks up the same device and she gets her favs and is limited to PG13.

And, as you mentioned, if your iDevice is lost or stolen -- it cannot be used to turn off "Find My Phone". That feature, alone, could make the best tablets, phones, music players, computers, etc... the worst ones to steal -- because they are only useful to the owners!

We have been considering getting iPhones for my 2 teenage boy grandkids. Data costs are an issue... so is the "desirability of the iPhone for thieves"...

Edited by Dick Applebaum - 8/16/12 at 1:09pm

"Swift generally gets you to the right way much quicker." - auxio -

"The perfect [birth]day -- A little playtime, a good poop, and a long nap." - Tomato Greeting Cards -

I'll speculate on something more advanced. AuthenTec was pitching a new technology. Fingerprint scanners have been around for a while. They pitched it to some of the following companies Alcatel-Lucent, Cisco, Fujitsu, HBO, HP, Lenovo, LG, Motorola, Nokia, Orange, Samsung, Sky, and Texas Instruments who all turned it down. According to the article because of the cost of developing it. If it's that pricey I expect it to be quite new engineering.

So here's my guess: it's a fingerprint scanner that goes in/under a screen. So as you swipe to unlock it scans your fingerprint. Not only does that away with having to enter the PIN code, but it would make for a seamless shopping experience. Google Wallet forces you to enter another PIN after unlocking to be secure. This could replace both. Plus, they could enable swipe to buy in iTunes so that customers don't have to constantly bother with entering their password.